Once given up for dead as an overproduced and underutilized commodity, natural gas has risen from the ashes with a vengeance. A combination of a much colder winter than last year, less exploration and production, and an increase in foreign demand has driven the price back up. Last week, the Henry Hub spot price rose from $3.96 per million British thermal units (MMBtu) last Wednesday to $4.08 per MMBtu on Friday, its highest level since September 2011.
In a report hot off the presses, the strong natural gas showing during the first quarter is not lost on the energy team at Deutsche Bank A.G. (NYSE: DB). Their outlook for the balance of this year and beyond remains positive for continued outperformance, because relative valuations remain attractive and the industry capital investment profile remains intact. The bottom line is, with record low costs of capital, companies are going to spend, and other companies will benefit.
With the natural gas sector showing an average dividend yield of 3.6% and a dividend growth rate of more than 10% compared to the Standard and Poor’s 500 dividend yield of 2.1% and dividend growth of about 5%, the analysts at Deutsche Bank are bullish on the sector and look for additional upside in 2013 and beyond. Here are the top stocks to buy from their new report.
They upgrade Plains All American Pipeline L.P. (NYSE: PAA) to Buy from Hold. Citing positive fundamentals and an industry-leading growth rate, Deutsche Bank moved its price target for the stock from $52 to $66. The Thomson/First Call estimate for this top tier name is $57. Investors also receive a solid 4% distribution. As a reminder, MLP distributions may include return of principal.
Enterprise Products Partners L.P. (NYSE: EPD) is another to name to buy. Based in Houston, Enterprise provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and petrochemicals in the United States and internationally. The Deutsche Bank price target for the stock is $65. The Wall St. consensus estimate is $61. Investors receive a 4.40% distribution paid quarterly.
Led by industry legend Rich Kinder, Kinder Morgan Energy Partners L.P. (NYSE: KMP) is another top pick. The Deutsche Bank price target for this highly respected name is $98. The consensus target is lower at $90. Investors are paid a generous 5.70% distribution. This may be one of the best total return names for investors to own.
In the gathering and processing subsector, Western Gas Partners L.P. (NYSE: WES) is a top name to buy. The Deutsche Bank target for the stock is $63. The consensus price target is lower at $60. Western pays investors a 3.50% distribution.
Access Midstream Partners L.P. (NYSE: ACMP) makes the gathering and processing cut as well. Based in Oklahoma City, the company focuses on natural gas and natural gas liquids gathering operations. The Deutsche Bank price target for the stock is $41, and the consensus target is right in line at $41. Investors receive a solid 4.5% distribution.
One final name that makes the Deutsche Bank list is in the general partner category. Once again it is run by the man who left the now infamous Enron before its downfall, Richard Kinder. Kinder Morgan Management LLC (NYSE: KMR) is a stock to buy with a $90 price target. The consensus estimate is $88.12. The company does not pay a distribution to investors.
The team at Deutsche Bank continues to favor the companies that show high rates of growth that are not commodity sensitive. In the first quarter of this year, oil prices declined by 8% while natural gas prices rose by 38%, and NGLs prices dropped 25% while margins fell 38%. Companies that can avoid that volatility, and supply investors with solid total return, are a good addition to any portfolio.